Let The Market Tell You Which Way Is The Path Of Least Resistance

A predictable reflex rally carried stocks higher from the opening bell on Monday, traders looking to scoop up bargains after a two week sell-off in the broad market. Volume was lackluster, the Bulls having any easy time moving equity prices higher into the close. The real test will be on the next down turn; will S&P (^GSPC) prices (presently 1,040.46) hold the 50-day Moving Average (1022.93), and Friday’s low (1020)?

The truth of the tape won’t be known before this battle takes place.

Gold (GLD +1.38%) lit it up, refusing to sink below the psychologically important level of 1000 dollars on ounce. The plot thickens as a huge inverse head and shoulders formation gives gold bugs confidence that ultimately the fiscal and monetary recklessness of the US government spending spree will cause precious metals to go vertical. However, for the most part, we decided to sit it out until we see confirmation of a break-out, whereupon we will put on heavy positions.

Bonds (TLT +0.12%) were sharply unchanged and remain at the crossroads. On Friday US bonds gave up a large gap higher, reversing, finishing lower on the day (TLT -0.56%). The action in bonds was noteworthy as the reversal came on increased weekly volume, precisely at the level of the high of September 2008 weekly bar. Once this level (just under 101 in TLT) was finally exceeded, it became support, providing multiple weeks of support earlier this year (Feb though March) as the stock market tried to put in a bottom. Additionally, this area represents a .382 retracement of the bear move from the December 2008 high to the June 2009 low. This move lasted approximately 25 weeks; projecting out a .618 multiple from the June low gives a time turn date of the first week of October; something to keep in mind.

Closing above the .618 retracement of the recent decline (1057 basis the Dec future) will put short sellers on the defensive. With earnings season yet to fully get underway, the market may chop around, for a while longer frustrating both Bulls and Bears.

Keep an open mind, letting the market tell you which way is the path of least resistance. S&P 1080 would be an upside break-out. Will the US Dollar continue to move much lower to permit that? Will corporate earnings be enough of a boost?

Have a great day.

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